The NHS spends £100bn (€113bn; $153bn; 2009 figures) a year. It spends this money through a series of financial relationships, some of which are contractual or organisational ones, such as those between commissioners and providers. Other financial relationships are between individuals and organisations, such as contracts with medical staff.
This money flows round the system through these relationships, and we can develop them to gain better value for money. In 2010 we are well placed to use incentives to improve health outputs without increasing resources.
In a pre-reformed NHS one of the abiding ways in which inefficiency was incentivised was that if a hospital ran out of money in January it would get a winter allowance to ensure that it survived the year. Those hospitals that worked hard to keep within their budget were not rewarded with extra money, whereas those that had spent their budget before the end of the year were—an odd way to encourage value for money.
In any healthcare organisation improving value for money is difficult. It means discussing and changing the way in which medical professionals work. Some form of incentive structure has to be in place to encourage institutions to do this hard work.
One way to encourage efficient behaviour is for real consequences for inefficiency to exist—and positive consequences for efficiency are also needed. Why should an organisation work hard to improve their financial position by 10% if someone takes that money at the end of the year? This is the rationale behind foundation trusts. An organisation having the autonomy to keep the resources that they create through greater efficiency is a good incentive for efficiency. The equivalent for primary and community health organisations—that is the right to keep the finances that they create through efficiency—will have an impact on all providers.
Although technical efficiency affects how an organisation develops value for money by bearing down on costs, allocative efficiency has an impact on the way in which resources are used. An improved allocative efficiency is developed when the system allocates the resource for treating the patients to that part of the health system that provides the best value for money in the system.
Allocative efficiency needs incentives to work across organisations to maximise care in the most efficient locations. At the moment the tariff is primarily used to pay an organisation for the work that it does. A tariff is being developed that encourages the creation of a patient pathway, and places the greatest surplus to be made by keeping people away from expensive care.
An example is long term care. It has been estimated that about half of the cost of diabetes care comes from complications and emergency admissions—both of which require admission to hospital. Obviously people with diabetes must know that they can go to hospital when they need to—however expensive that treatment is.
The patient and the system as a whole, however, do not want patients to be regularly admitted as emergencies. It disrupts the lives of patients, and is expensive to the system. So the patient and the healthcare system need a patient pathway that encourages as much self management as possible. When the patients feel they cannot manage themselves a strong and fast primary care intervention should exist to keep them out of hospital.
A tariff is being developed that looks at the cost of a year’s diabetic care, and which encourages the provider who is managing that year with the patient to keep the patient out of hospital. Seventy five per cent of the NHS’s expenditure is spent on long term conditions, and so it is the management of those conditions that provides the biggest opportunity for using a tariff that will incentivise allocative efficiency.
Cite this as: BMJ 2010;340:c1999
Competing interests: The author has completed the Unified Competing Interest form at www.icmje.org/coi_disclosure.pdf (available on request from the corresponding author) and declares that (1) he has had no financial support for the submitted work; (2) he works as a management consultant and much of his work concerns issues of value for money and he has travel and accommodation paid for by clients, he is a senior fellow of the Kings Fund for which he receives an honoraria; (3) his wife is a member of parliament; and (4) he is a member of the labour party.